Funds Threaten to Quit Norway in Tariff Backlash: Nordic Credit

Creditors are teaming up with equity holders in threatening to stop investing in Norway if it goes ahead with a proposed cut in gas infrastructure income.

Western Europe’s biggest oil and gas producer unveiled plans in January to cut tariffs on its Gassled pipeline by 90 percent. Investors behind the venture estimate the decision will reduce their income by about $7 billion. While the government has so far mainly fielded complaints from shareholders, creditors funding Norway’s infrastructure may now also reconsider their commitment, according to Export Development Canada, which provides loans to support Canadian trade.

“The proposed tariff reduction on Gassled, if implemented, would have a far reaching impact on our desire as external finance providers to fund additional Norwegian projects,” EDC said in a letter to Norway’s oil minister, obtained by Bloomberg News. “This could be felt not only in the energy sector but also in other sectors, thereby increasing the net cost of these projects.”

Norway’s gas tariff dispute is turning into a replay of its snub to credit markets 1 1/2 years ago, when the Industry Ministry decided to wind down Eksportfinans. The lender, created half a century earlier to fund Norway’s exports, lost government backing after European capital rules forced it to limit its loans. The move triggered junk ratings at Standard & Poor’s and Moody’s Investors Service, and forced losses on creditors holding about $39 billion based in Europe, Asia and the U.S.

Eksportfinans Yields

While the government’s treatment of Eksportfinans initially sent yields surging, its bonds have since recovered. The yield on the lender’s 3 percent note due November 2014 eased to 3.24 percent this week. The yield on Norway’s 2 percent government bond due 2023 rose to 2.19 percent yesterday, from 2.06 percent at the end of last week.

EDC, along with Guardian Life Insurance Co. of America and Unum Group, funded Gassled investor Solveig Gas Norway AS when it acquired a stake in the pipeline system. That followed divestments in Gassled by Statoil ASA of Norway, Royal Dutch Shell Plc, Exxon Mobil Corp. and Total SA.

Companies controlled by UBS AG, Allianz SE, Canadian pension funds and Abu Dhabi’s sovereign wealth fund together spent $5.6 billion on acquiring a 44 percent stake in Gassled.

Government Response

The Oil Ministry has brushed off the investor criticisms. Lars Erik Aamot, head of the ministry’s oil and gas department, said in a February interview that what investors have “paid isn’t relevant to our policy,” adding he doesn’t know “what expectations they had for returns.”

The government of Prime Minister Jens Stoltenberg argues the cuts will help make gas discoveries more profitable and boost recovery rates. Norway’s proposed tariff reduction affects gas volumes contracted after May 1 for the 7,800 kilometer pipeline network.

“This could have a lasting impact on the cost and availability of funds to finance future infrastructure investments in Norway,” EDC said.

Moody’s Investors Service and Standard & Poor’s have both warned they’re considering downgrading the debt of Solveig by more than one level on concerns the tariff cuts will hurt revenue and make refinancing of existing debt more difficult.

Solveig’s other debt investors have also expressed surprise at Norway’s decision, which they argue will hurt cash flow.

‘Negative Impact’

“We are concerned that this proposed change represents a new type of regulatory dynamism in Norway that could have a lasting negative impact on the cost and availability of future funds to finance infrastructure investments” there, Ben Vance, a senior managing director at Provident Investment Management LLC, a unit of Unum Group, said in a March 15 letter obtained by Bloomberg. The Chattanooga, Tennessee-based insurer lent $49 million to Solveig, according to the letter.

“We would like to add to our Norwegian bond exposure over the coming years,” Vance said. “However, if the new pipeline tariff structure is implemented as currently proposed, we would need to revisit our future investment plans in the country as our confidence in the country’s commitment to stability and fairness will have diminished.”

Barry Scheinholtz, a senior director at Guardian Life Insurance Co. of America, wrote that the policy reversal “could have a negative impact on our desire to participate in future financings of Norwegian projects,” according to a March 14 letter obtained by Bloomberg.

Norway Critics

Criticism has also come from inside Norway’s investor community. The country’s state-run pension fund, which bought bonds from Njord Gas Infrastructure AS in 2011, said in a March 15 letter that it would reconsider infrastructure-related investments should the proposal be enacted.

Investments in Norway’s offshore oil and gas fields will grow 15 percent to 199 billion kroner ($35 billion) this year, reaching 7 percent of gross domestic product, the statistics office estimated last month.

As the government prepares its final ruling on the Gassled tariffs, investors including Solveig and Njord are threatening to turn their backs on future projects, including buying out oil companies that are spending 25 billion kroner on the Polarled pipeline, a new link from fields in the Arctic.

Norway should reconsider the tariff proposal and realign its interests with “those of the Gassled investors and debt providers with the ultimate goal of supporting further development of the Norwegian infrastructure projects,” Scheinholtz said.

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